Macro1 (Econ1010)

Lecture 1
(Chapter 1, 2)
What is Economics?
What is Macroeconomics?
<Lecturer name>

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 Welcome to Macro1 and your first
(serious) study in Economics!
You will be studying Economics
such an exciting time in a history!
- Brexit and Trump what are the implications of
these political outcomes on the economy?
Industry 4.0 and the future of work
Increasing inequality not just between countries
but within countries
Dealing with climate change in a global economy
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Before going into detail, a bit of
house keeping for macro1

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 RMIT Blackboard
https://lms.rmit.edu.au/
Ensure to login in every week to keep up to date
(many questions you may have will be mostly answered
in Blackboard)
For the first time, click Start here
Learning Resources you can obtain weekly lecture
slides, tutorial questions
Wednesdays lectures will be recorded and will be put
on Learning Resources so, no need to panic even if
you miss a lecture!

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Aplia (online self learning resource)
You can complete weekly practice problems
using APLIA (these are not graded but are
useful for revision and test/exam practice)
Aplia is available via Blackboard
It contains lots of practice questions for each
chapter (tip: its useful to practice MCQs as
part of your preparations for in final exam)
You can use this resource even if you do not
buy a textbook!
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 Three assessment components

1. Online test (10%) Multiple-choice questions

to be done by the end of Week 4
2. Two assignments (20% x 2) short answer,
individual assignments
The first one is due in by the end of Week 7, and
second one is due in by the end of Week 10 (see
Blackboard for exact due dates)
3. Final exam (50% ) - multiple-choice questions
50 questions in a 2 hour exam
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 Tutorial sessions
Tutorials starting from next week (no tutorial in
this week)
In tutes we will discuss the answers to tutorial
questions and if time is left at the end we can
talk about other relevant issues
Best to attempt questions prior to the class
You only come to tutorials in which you have
registered, otherwise you will kicked out!
Make sure to bring a print-out tutorial question
sheets in every class, which is available in
Blackboard. 7
 Additional help
Your Tutor
online course assistance (see Blackboard)
Student Learning Advisor Mentors (SLAMs)
Drop in session but with students who have
done well in the course before (available
from Week 4)
Drop in sessions around assessment due dates
Check Blackboard as announcements will
provide details closer to the dates
Highly recommend to use these services 8
 FOR ALL QUESTIONS
Email to macroeconomics1@rmit.edu.au

A designated staff will respond to your

emails

Using this email is the quickest and safest

way to to ensure your questions are
attended to
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 To succeed in Macro1
Attend classes and be present (not distracted by FB
or your friends)
Take notes during class and dont be afraid to ask
questions
Read the text (preferably read chapters before
attending lecture) and take an interest in current
affairs and issues affecting society, government and
the economy.
Keep up to date
Enjoy your time studying and be respectful of others
and open to new points of view and experiences
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LETS START TALKING ABOUT
MACROECONOMICS IN MORE
STRUCTURED WAY

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 Why we think it is important to study
Economics
Economics can be used in everyday life, because in
economics we study about decisions and the
decision making processes of individuals, firms and
the government.
Students with an understanding of economics are
well placed to do well in life (e.g. to get a better
job and be more successful at managing their
financial affairs)
When you understand economics you are
empowered to critically interpret economic data
and statements made in the news, by politicians, etc.
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 Chapter 1: Ten Lessons from
Economics
Learning Objectives:
Allocation of scarce resources
Trade-offs (opportunity cost)
Meaning of opportunity cost
Decision making at the margin
Role of incentives in influencing behaviour
Benefits of trade
Markets as a form of economic system to make key
economic decisions
Identifying trends from data
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 What an established economist
said about Economics as a
discipline
Maurice Obstfeld (2008):
The beauty of economics as an intellectual pursuit is its position at
the intersection of formal theory, statistical analysis, and human
events coupled with its ultimate potential to improve peoples
everyday lives. A master economist must assume away the
distracting inessential details of a situation in the interest of
mathematical clarity. At the same time, he or she must see how
relevant subtleties may affect the interpretation of the data and the
applicability of different models in real life. Because the ultimate
policy decisions at stake are so complex, with such vast potential to
do harm or good in the world, economics (and especially unsettled
subject to macroeconomics) is perpetually unsettled, constant
questioning and reassessment.
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 What Economists do ?
Economists are extremely influential to direct policy (e.g. the carbon
tax, interest rates...)

Economists use models to make predictions and identify trends within

data that may involve economic variables of interest (such as GDP)

Insights from economists based on their analysis informs decision

making

Some advantages of being able to use economic data and thinking like an
economist include:
Knowing how the economic policy works. This can give you extra
competitive edges at a workplace
Sound economic judgment can enhance your own decision making
capability. E.g. People doing well in the stock market know how to read
macroeconomics data 15
 What we will discuss today
We start with the fundamental principles of
economics (Ch. 1)

We discuss in detail what economists do (Ch. 2)

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 Ch. 1: Basic economics principles:
Scarcity
Scarcity refers to the limited nature of societys
resources.
For example, Hasan wished he had more time to
study but his time was a scarce resource.

But what are societys resources?

natural resources,
capital (physical and human)
labour (how we allocate our time)
and in a market economy add
entrepreneurship 17
 Scarcity

We encounter scarcity in every decision

we make.

For example, a household must decide

who does the chores and how to allocate
its scarce resources.

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 Scarcity
Likewise, society must decide what jobs will be done and
who will do them. It must also allocate the goods and
services that are produced.

Scarcity exists at individual level, firm level, government

level, societal level

Management of societys resources is important because

we cannot produce all the goods and services people
wish to have.
Hence decisions need to be made. These decisions are
economic decisions.
Economics is a social science about decision making in the face
of constraint (a scarcity constraint) 19
 Economics

Economics is the study of how society

manages its scarce resources.

For example, economics helped Jing to

understand the production, consumption
and transfer of wealth.

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 Economics
In most societies, resources are allocated
through the combined choices of millions of
households and firms.
Forces of demand and supply (that you learn
about in Prices and Markets)
Price signals guide decision making processes

Economists study how people make

decisions: how much they work, what they
buy, how much they save and how they
invest their savings. 21
 Economics
Economists also study how people interact with one
another.

For instance, economists examine how the buyers and

sellers of a good interact to determine the price at which
the good is sold and the quantity that is sold.

Also it is of interest to consider how behaviour is impacted

when incentives people (or economic agents) face change
(e.g. how does cutting corporate tax rate affect corporate
behaviour? Does it create more jobs? What is the
evidence?

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 Opportunity cost

Opportunity cost is the best alternative that

must be given up to obtain some item.

For example, my opportunity cost of sitting

through this lecture is reading a book and
enjoying an espresso at a local caf.

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The cost of something is what you
give up to get it
Decisions require comparing costs and
benefits of alternatives.
Whether to go to university or to work?
Whether to go to lectures or sleep in?

The opportunity cost of an item is what you

give up to obtain that item (it seems that this
way of thinking about cost is only applicable in
economics) 24
 What is your Opportunity Cost
(being in this lecture) today?
the value of the best alternative foregone
when action chosen

(Opp.Cost=what you give up/what you gain)

Efficient decision making involves weighing up

the alternatives and minimising opportunity
cost by choosing what provides you the
greatest benefit relative to cost 25
 Ch. 2: The economist as a scientist
Economists try to approach problems with a
scientists objectivity.

Observations inspire economic theory. In turn,

economic theory is tested by comparing
theoretical predictions against data gathered in
the real world.

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 Chapter 2: Thinking Like an
Economist
Learning Objectives:
How economists apply methods of science
How assumptions and models shed light on
understanding the world
Introduce the circular flow model
Microeconomics versus macroeconomics
Positive and normative
Role of economists in policy making
Why do economists sometimes disagree? 27
 The economist as a scientist

While it is difficult to conduct economic

experiments, events in the real world give rise to
natural experiments that can be studied by
economists.

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 The role of assumptions in economics

Many economic models involve simplifying

assumptions (or abstractions).

For instance: economists might assume that

there are only two goods in the world, or that the
firms and consumers in a market are only
concerned with what they buy and sell today.

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 The role of assumptions in economics
Assumptions help us to simplify complex
situations, focusing our attention on the details
that are most relevant to the problem at hand.

Using assumptions we can construct economic

models to learn about the world. Our models,
(especially those we will use in Macro1) typically
consist of diagrams and equations.

Lets consider a simple model in the form of a

diagram to explain a 2 sector economy that
assumes households and firms are the only
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economic agents in the economy
The circular flow diagram

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The Distinction Between Microeconomics
and Macroeconomics
Microeconomics is the study of how households
and firms make decisions and how they interact
in markets.
For example, microeconomics focuses on
individual markets, examining how incentives
and trade-offs influence buyer and seller
behaviour.

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 Macroeconomics

Macroeconomics is the study of economy-wide

phenomena, including inflation, unemployment
and economic growth.

Macroeconomics is a branch of economics dealing

with the performance, structure, behaviour, and
decision-making of an economy as a whole. This
includes national, regional, and global economies.

For example, the setting of monetary policy

depends primarily on macroeconomic factors. 33
 Macroeconomics can help us
understand some important issues
like
Why are some countries rich and others are
poor?
Why do prices change quickly in some periods,
but are more stable in others?
Why do jobs grow in some years, but stagnate in
other years?

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 The economist as policy advisor

Economists are experts. (But they dont always

make accurate predictions and they may
disagree with each other)

In government, the advice of economists can

have a significant impact on the development of
public policy.

In business, the advice of economists is

important for formulating corporate strategy.
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 The economist as policy advisor

Economists may be asked to explain the causes of

economic events, or to recommend policies to improve
economic outcomes.

In the first instance the economist is taking a positivist

approach, in the second the economist may be more
normative.

Both positive and normative approaches are valid and

which approach used depends upon what the task at
hand is that is economist is contributing to.

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 Positive statements

Positive statements are claims that attempt to

describe the world as it is.

An example of a positive statement is minimum

wage laws create unemployment.

This can be tested.

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 Normative statements

Normative statements are claims that attempt to

prescribe how the world should be.

An example of a normative statement is the

minimum wage should be raised.

This is subjective and cant be tested. There will

be arguments for and against this propostion.

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 Why economists disagree
Positive statements are statements about facts.

Economists do disagree about facts from time to time.

These are disagreements about scientific judgement
used in obtaining facts.

Normative statements depend on both facts and

values.

It is in normative areas economists most often

disagree (e.g free market economists in the
Austrian tradition versus Keynesian economists)
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 Why economists disagree

A disagreement about public policy can come

about when economists hold different values,
such as the appropriate trade-off between equity
and efficiency.

One final thought to reflect upon:

Equity versus efficiency is proving to be a major
issue in a globalised era and as Industry 4.0 is
increasingly realised. What do you think about
this???
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